U.S. Economy Shrinks For First Time In Over Three YearsThe U.S. economy actually shrank a bit in the fourth quarter. It was a tiny decline at one tenth of a percent, but it goes down as the first negative quarter in three and a half years. A sharp decline in government spending and a fall in business inventories were big factors.

And I'm Melissa Block. The U.S. economy unexpectedly slammed to a halt in the last quarter of 2012. The Commerce Department said today that the nation's growth rate shrank during the last three months of the year, falling a tenth of a percentage point. That decline raises big questions about the strength of the economy going forward.

We're joined now by NPR's Jim Zarroli. And Jim, these numbers we're talking about for the fourth quarter seem to have caught everyone by surprise. Put it into some context of the year overall. How big a slowdown does this represent?

JIM ZARROLI, BYLINE: Well, it was a surprise. I mean, nobody predicted this. In the third quarter of the year, the economy was growing 3.1 percent and we knew that growth wouldn't keep up at that pace, but if you believe the numbers that the Commerce Department put out, we actually saw a slight contraction. I mean, growth reversed course.

BLOCK: And when you think about what was going on at the end of the year, you can think of a lot of factors that might have played into that. Did the Commerce Department say, in particular, what they think was behind this big drop in GDP?

ZARROLI: Yeah, there were several factors. I mean, there was a big drop in government spending, especially in defense. Defense spending fell by 22 percent. Now, that was partly because of the fiscal cliff, apparently. In other words, you had government agencies that were facing spending cuts and, you know, the idea is maybe they cut back in spending sort of in anticipation of that.

You also had companies cutting back on inventories, producing less because they didn't think there would be demand for their products. And then, the other thing that happened, there was a big drop in exports, which was at least partly because of the slowdown in Europe.

BLOCK: Well, we have an economy that's not growing. At least, it wasn't at the end of last year. Does that mean that the outlook for the year ahead is worse than we thought?

ZARROLI: Well, you know, on the face of it, I guess it's not a good sign, but a lot of economists were sort of downplaying the numbers today. I mean, they say, you know, there were some very specific things that happened at the end of 2012. One of them was Hurricane Sandy and then there was the fiscal cliff crisis, which probably had a big impact on federal spending.

And these are the things that affect the growth rate, but they are unlikely to be repeated and you also have to say that there were good things going on in the economy. I mean, the housing market was doing better, consumer spending was up a bit. Now, you know, how can you have consumer spending going up when the economy is shrinking? It's really one of the paradoxes here.

BLOCK: Well, officials from the Federal Reserve met today. After that meeting, did they give any sign that the weak growth rate we saw in the last quarter is going to have an impact on their policy?

ZARROLI: Yeah, I mean, Fed officials have sort of been proceeding as if the economy is already too weak. I mean, they've been pursuing these quantitative easing measures, which basically amount to buying a lot of Treasury bonds and mortgage-backed securities and then the idea is they put money into the financial system, which brings interest rates down.

And Fed officials have been saying that they're going to keep doing this until the unemployment rate hits 6 and a half percent. It's now 7.8. So after the meeting, they basically came out and said they were staying the course.

BLOCK: On Friday, Jim, the Labor Department is supposed to release the January unemployment report. Does this slowdown in growth foreshadow, do you think, a disappointing jobs report at the end of the week?

ZARROLI: Well, I think the jobs report will certainly tell us something about how weak the economy really is, I mean, whether the decline in growth that the Commerce Department is talking about was an aberration or not, because there's a lot of other evidence right now that the labor market is doing okay. We've had a drop in first-time unemployment claims. We had an increase in payroll numbers from the payroll company ADP.

So if the economy were really beginning to contract, you wouldn't see that kind of a thing happening.

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